With one large move, Nova Scotia-based supermarket chain Sobeys has gone from a small player in B.C.’s grocery store market to one of the province’s dominant players by buying Canada Safeway for $5.8 billion.

Consumers likely won’t see big changes, according to retail consultant David Ian Gray, because Empire Co., parent of the 106-year-old Sobeys grocery chain, won’t want to abandon the goodwill that Safeway has built up through its Air Miles and Club Card loyalty programs or alienate its existing customer base.

Gray, the principal of his firm DIG360 Consulting, said Sobeys would also be wary about surrendering Safeway’s brand value, because rebranding is an expensive proposition.

Of Safeway’s 223 Canadian stores, 75 are in B.C., with 40 in the Lower Mainland alone.

“This is a very big retail story,” Gray said, adding Sobeys is “very much in competitive fight mode” against U.S. giants Walmart and Target.

“That’s huge. A lot of moves in retail in the last few years have been both in response to Walmart’s roll out and in anticipation of Target’s arrival,” Gray said. “Canadian retail has had to become much better retailers in a hurry.”

This all-cash deal intensifies a market battle sparked by the recent arrival of Target in Canada, which hastened Walmart’s vast expansion of its grocery operations in this country over the past 18 months. As fortune would have it, Sobeys already supplies Target’s grocery department.

“The acquisition of Canada Safeway continues Empire’s focus and commitment on our food retailing and related real estate businesses,” Paul Sobey, chief executive of Empire Co., said to analysts on a call discussing the deal. “The acquisition allows us to leverage our existing assets and position Sobeys to compete even more effectively within the changing, and increasingly competitive, grocery retail landscape.”

Within Metro Vancouver’s grocery market, merchants have been scrambling to stake out segments in the face of mounting competition.

In January, local player H.Y. Louie Co. opened a new concept, Fresh St. Market, in West Vancouver aiming at the higher-end market with organic fresh meat and produce with a high level of service.

At the time of opening, H.Y. Louie’s Mark McCurdy said “you either go low-end, no frills, or you give customers a great experience.”

The food business is getting tougher and the divide is increasing between low-end stores such as Buy-Low and PriceSmart and the higher-end stores such as Overwaitea’s Urban Fare and Whole Foods, which sell freshness and service, David Lam, a Deloitte partner in mid-market corporate finance, told The Sun.

CIBC industry analyst Perry Caicco referred to Safeway as the “big prize in the consolidation sweepstakes” of the fiercely competitive food retail business.

Sobeys bought 20 Thrifty Foods stores in 2007 for $260 million. Today it owns 31 Thrifty Food stores, and have continued to operate them under the Thrifty brand.

Gray said the cost savings that can be found in a bigger company mostly take place behind the scenes in areas such as advertising, marketing, supply and distribution, so it is not as important to operate under the same name.

The purchase will put Sobeys solidly in second place in the national grocery market, with annual revenues of $24 billion and $1.8 billion in owned real estate.

Gray said B.C.-based Overwaitea Food Group is one of the last regional independent grocery businesses.

“They’re probably the next ripe takeover target,” Gray said, naming Central Canada’s Metro as another grocer that might be looking to expand.

Gray said his perception has always been that Safeway Canada was an afterthought division of their American parent company.

“Safeway in Canada has spruced up their stores a bit, but nothing Earth-shattering. They’re not the low-cost provider, they’re not the freshest, they’re in the middle,” Gray said. “But the one thing they do have is a lot of real estate.”

Aside from real estate, Safeway also has its two loyalty programs, which combined have a lot of potential for data mining and predictive selling, Gray said.

“They’re sitting on a potential gold mine,” he said. “A lot of these companies do not have a loyalty program or it’s in its infancy.”

Safeway was one of the first partners in the Air Miles program, but Gray said they have not used the information gathered through the program to its full potential.

“What I would hope would happen with the Sobey’s influence would be to really refine both of those programs and really start to look at leveraging the information,” Gray said. “What Sobeys may gain from that is a window into how it works and it may expand out into Sobeys.”

Any existing sponsorships would likely remain in place at least in the short term, Gray said.

“This isn’t a crisis purchase,” Gray said. “They don’t want to alienate their constituents, but eventually, it could be that Sobeys (would) evaluate the quality and the fit of those sponsorships over time.”

Empire said it will modernize Safeway’s distribution networks, reduce costs in procurement, administration and marketing, and leverage Sobeys’ IT infrastructure.

The chains will integrate private label merchandise offerings and loyalty programs and cross-promote their food and fuel businesses.

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Grocery chain Sobeys buys Canada Safeway for $5.8 billion

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